Gold will rise to over US$ 1,000...

Feb 13, 2009

In this issue:
» Buy gold, says James Turk
» Ambani to finally get his helipad
» Harvard University shunning stocks?
» The rail budget is out
» ...and more!

In a scenario where the global financial crisis is deepening, liquidity is drying up and governments are printing money as a result of which currencies are losing their value, gold appears to be the safest bet. This view has been put forth by James Turk, founder and chairman of GoldMoney. In fact, Mr. Turk contends that even US government treasuries are not safe given that interest rates on long term paper are starting to rise, which means that prices will most likely fall going forward. Also, the fact that the US is highly indebted with higher chances of default means that the investments in treasuries seem wobbly. The US dollar is also witnessing a bubble which is most likely to burst as the government resorts to printing more of the currency. Thus, in these times, gold and physical gold at that is the best asset to be in. Mr. Turk is of the opinion that the price of this precious metal will rise to over US$ 1,000 per ounce in the next month or two and stay above US$ 1,000 for the rest of the year.

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At a time when one of the world's greatest investors is advocating getting into stocks, some of the world's largest institutions are busy coming out of them. And latest on the list of 'equity shunners' is none other than Harvard University, the world's richest school. According to filings mandated by regulators, the University's investment management arm, Harvard Management Co. (HMC) has drastically cut its exposure to equities during the fourth quarter. If one were to put numbers, total exposure to equities at the end of fourth quarter stood at US$ 571 m, a chicken feed as compared to an exposure of US$ 2.9 bn during the third quarter of 2008. After a decade long dream run, where Harvard's investment performance had become the envy of most Ivy League Schools, its endowments have shrunk by 22%, prompting the HMC to not only move out of equities but also undertake cost reduction measures. And as part of the same, it will now hand over pink slips to at least 25% of its money managers. More pain is likely to follow as HMC has talked of losses climbing even further.

Brands are highly valuable assets, especially in service industries. Ramalinga Raju not only built an IT company over the years, but also a valuable brand - 'Satyam'. He has also killed it. As per a leading business daily, the Satyam board has started the process for inviting bids from potential suitors for taking over the company. The board also agreed that when the buyout is over, brand 'Satyam' may be done away with.

Raju's deeds have brought such disgrace to the company that its identity might need a break from the past. We believe that at a personal level it might actually promote justice - not only will he do jail time, his corporate legacy will also be erased. However, at a societal level - wealth has been destroyed.

The man who sowed the seeds of 'cheap money' in the US has admitted that he was flummoxed by the scope of the subprime mortgage market. Yes, we are talking about the former Fed Chairman Alan Greenspan. Mr. Greenspan lately had received a lot of flak for expanding the money supply and keeping the interest rates low for too long which fuelled reckless spending among Americans, caused asset bubbles and sparked the subprime crisis. Besides not being able to make sense of the complex derivative products created out of these mortgages, he admitted that it was only well into 2005 that the first signs of the crisis were visible.

That said, the former Fed chairman defends his position saying his hands were tied. As quoted in New York Times, this is what he had to say, "If we tried to suppress the expansion of the subprime market, do you think that would have gone over very well with the Congress?" He further went on to add that had he taken steps to prevent the crisis, the outcome would have been painful as the growth of the American economy would have been stifled generating 10% unemployment rate. We wonder if this logic makes sense given that the US has already sunk into a recession with the unemployment rate mounting to above 7%.

An Air India airbus nearly collided with an IAF chopper from the Presidential convoy at the Mumbai airport on Monday. Sounds scary, doesn't it? It certainly got the government's attention and gave it just the push required for clearing a proposal to allow helipads atop buildings in Mumbai. Ironically, the event that could have proved to be tragic for the president, turned out to be a stroke of good luck for Mukesh Ambani. As per Mumbai Mirror, Mr. Ambani will finally receive the official go ahead he has been seeking to construct a helipad atop Antilia, his upcoming 40 storey residential tower in Mumbai.

The Railway minister presented the interim railway budget today. While some rate cuts were announced in passenger tariffs, the freight rates were kept unchanged. The ministry plans to start 43 new trains in FY10. Railway freight revenue has registered an average growth of 8% over the last five years. During FY08, freight transport stood at 794 MT, up by 9% YoY. The operating ratio for FY09 has been projected at 88% and for FY10 at 89%. The Ministry of Railways plans to invest around Rs 2,300 bn over the 11th Five Year Plan, having invested Rs 368 bn during FY09.

Just a couple of weeks back we had raised questions about Reliance Power winning its third ultra mega power project (UMPP) at Tilaiya in the eastern state of Jharkhand. Given that the company is already in process of executing two other UMPPs in Sasan (Madhya Pradesh) and Krishnapatnam (Andhra Pradesh), we put forward our concerns with respect to execution given the tight economic environment and company-level risks.

Today's newspapers vindicate our concerns to some extent. Reliance Power is reported to be facing project delays given the global credit crunch and the company's large requirements of finance to fund its projects. The company's top level executives have confessed that the lead time for getting loans has increased. Investors, who bought the company's stock in its mega-IPO last year and even after that, are already sitting on huge losses. In taking more on its platter than it can execute successfully, the company now seems to have raised the risk levels further.

Ray Kroc was the first to recognise the potential of the fast food industry. He was also very clear about his business. He once said that McDonald's is in the real estate business. The only reason they sold hamburgers is because they are the greatest producer of revenue from which their tenants can pay rent to the company.

With property prices crashing across Asia, guess what McDonald's is doing. "It's a time to gain market share," says Tim Fenton, the company's president for Asia. He adds, "We will not cut back on anything, we will accelerate if anything." Given its strong cash flows, no wonder the company is taking advantage of local weakness. Just goes to show how fortunes differ among companies even in extremely difficult circumstances.

Imagine being awarded US$ 121 m for taking a firm to bankruptcy! That is exactly what top four executives at Merrill Lynch enjoyed just before the company was acquired by Bank of America. In all, Merrill Lynch has been accused of secretly awarding as much as US$ 3.6 bn in bonuses to its employees, with Bank of America's apparent complicity. This was at a time when the company reported losses of US$ 15 bn for 4QCY08 and of US$ 27 bn for the full year. More such skeletons are expected to be recovered as the chief executives from the eight largest US banks face the lawmakers today at a committee hearing in Washington. All that we can say is that responsibility and accountability seems to have been thrown out of the window and it will take more than billion dollar stimulus packages to set the financial system in order.

The Indian benchmark index, the BSE-Sensex gained almost 2% today. It was in line with its Asian peers which also saw healthy gains, led by China's Shanghai Composite that gained over 3% today. The major European indices are also trading in the green currently on the back of optimism that governments will step up efforts to revive the economies and rescue banks. Crude oil prices rose about 1.9% along with the rise in stock markets around the world.

 Today's investing mantra
"In security analysis the prime stress is laid upon protection against untoward events. We obtain this protection by insisting upon margins of safety, or values well in excess of the price paid." - Benjamin Graham

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1 Responses to "Gold will rise to over US$ 1,000..."

madhavi elec

Apr 9, 2009

yes. 2day onwards the gold rate may increased

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